LMI Aerospace (LMIA) 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý   Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended June 30, 2007.

¨   Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from           to           .

Commission file number: 000-24293

LMI AEROSPACE, INC.

(Exact name of registrant as specified in its charter)

Missouri (State or other jurisdiction of incorporation or organization)	43-1309065 (I.R.S. Employer Identification No.)
411 Fountain Lakes Blvd. St. Charles, Missouri (Address of principal executive offices)	63301 (Zip Code)

(636) 946-6525

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý                                No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨                                                      Accelerated Filer ý                                           Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                                No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

On July 30, 2007, there were 11,220,227 shares of our common stock, par value $0.02 per share outstanding.

LMI AEROSPACE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDING JUNE 30, 2007

PART I.FINANCIAL INFORMATION
	Page No.
Item 1.  Financial Statements (unaudited).
Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006.	3
Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2007 and 2006.	4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006.	5
Notes to Condensed Consolidated Financial Statements.	6
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.	12
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.	18
Item 4.  Controls and Procedures.	19
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings.	20
Item 1A.  Risk Factors.	20
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.	20
Item 3.  Defaults Upon Senior Securities.	20
Item 4.  Submission of Matters to a Vote of Security Holders.	21
Item 5.  Other Information.	21
Item 6.  Exhibits.	21
SIGNATURE PAGE	22
EXHIBIT INDEX	23

2

PART I

FINANCIAL INFORMATION

LMI Aerospace, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

	(Unaudited)
	June 30, 2007			December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	9,985		$	24,411
Short-term investments		16,224			2,243
Trade accounts receivable, net of allowance of $239 at June 30, 2007 and $311 at December 31, 2006		19,171			14,658
Inventories		37,200			33,956
Prepaid expenses and other current assets		1,622			1,760
Deferred income taxes		2,199			2,210
Income taxes receivable		548			232
Total current assets		86,949			79,470
Property, plant and equipment, net		17,585			19,514
Goodwill		5,653			5,653
Customer intangible assets, net		3,220			3,425
Other assets		934			548
Total assets	$	114,341		$	108,610
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	7,878		$	9,758
Accrued expenses		4,447			3,916
Short-term deferred gain on sale of real estate		233			147
Current installments of long-term debt and capital lease obligations		319			238
Total current liabilities		12,877			14,059
Long-term deferred gain on sale of real estate		3,890			2,493
Long-term debt and capital lease obligations, less current installments		776			583
Deferred income taxes		965			965
Total long-term liabilities		5,631			4,041
Stockholders’ equity:
Common stock, $.02 par value per share; authorized 28,000,000 shares; issued 11,608,183 shares and 11,577,631 shares at June 30, 2007 and December 31, 2006, respectively		232			232
Preferred stock, $.02 par value per share; authorized 2,000,000 shares; none issued in both periods		-			-
Additional paid-in capital		66,293			66,104
Treasury stock, at cost, 389,432 shares at June 30, 2007 and 389,732 share at December 31, 2006		(1,848	)		(1,849	)
Retained earnings		31,156			26,023
Total stockholders’ equity		95,833			90,510
Total liabilities and stockholders’ equity	$	114,341		$	108,610

See accompanying notes to condensed consolidated financial statements.

3

LMI Aerospace, Inc.

Condensed Consolidated Statements of Operations

(Amounts in thousands, except share and per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2007			2006			2007			2006
Net sales	$	33,935		$	32,768		$	66,112		$	62,010
Cost of sales		24,717			23,921			48,623			44,842
Gross profit		9,218			8,847			17,489			17,168
Selling, general and administrative expenses		4,933			4,170			9,943			8,371
Income from operations		4,285			4,677			7,546			8,797
Other income (expense):
Interest income (expense), net		185			77			391			(350	)
Other, net		(30	)		(1	)		(23	)		1
Income before income taxes		4,440			4,753			7,914			8,448
Provision for income taxes		1,549			1,796			2,782			3,182
Net income	$	2,891		$	2,957		$	5,132		$	5,266
Amounts per common share:
Net income per common share	$	0.26		$	0.27		$	0.46		$	0.54
Net income per common share assuming dilution	$	0.26		$	0.26		$	0.46		$	0.53
Weighted average common shares outstanding		11,150,899			11,112,507			11,150,899			9,837,038
Weighted average dilutive common shares outstanding		11,267,118			11,239,257			11,271,228			9,961,988

See accompanying notes to condensed consolidated financial statements.

4

LMI Aerospace, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30
	2007			2006
Operating activities:
Net income	$	5,132		$	5,266
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,759			1,905
Charges for bad debt expense		221			34
Charges for inventory obsolescence and valuation		460			352
Restricted stock compensation		187			86
Changes in operating assets and liabilities:
Trade accounts receivable		(4,734	)		(1,362	)
Inventories		(3,704	)		(5,298	)
Prepaid expenses and other assets		(270	)		(97	)
Income taxes		(262	)		(2,618	)
Accounts payable		(1,880	)		1,485
Accrued expenses		141			528
Net cash (used) provided by operating activities		(2,950	)		281
Investing activities:
Additions to property, plant and equipment		(3,542	)		(1,846	)
Purchase of debt securities		(16,017	)		(6,342	)
Proceeds from matured securities		2,250			-
Proceeds from sale of real estate		5,920			-
Acquisition of Technical Change Associates		-			(614	)
Other, net		(362	)		2
Net cash used by investing activities		(11,751	)		(8,800	)
Financing activities:
Proceeds from public offering		-			39,249
Proceeds from issuance of debt and origination of capital leases		408			-
Net payments on revolving line of credit		-			(8,898	)
Principal payments on long-term debt and notes payable		(134	)		(5,036	)
Proceeds from exercise of stock options		1			110
Net cash provided by financing activities		275			25,425
Net (decrease) increase in cash and cash equivalents		(14,426	)		16,906
Cash and cash equivalents, beginning of year		24,411			35
Cash and cash equivalents, end of quarter	$	9,985		$	16,941
Supplemental disclosures of cash flow information:
Interest paid	$	62		$	504
Income taxes paid (refunded), net	$	3,084		$	5,800

See accompanying notes to condensed consolidated financial statements.

5

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

June 30, 2007

1.  Accounting Policies

Description of Business

LMI Aerospace, Inc. (the “Company”) fabricates, machines, and integrates formed, close tolerance aluminum and specialty alloy components and sheet metal products for use by the aerospace, semiconductor and medical products industries. The Company is a Missouri corporation with headquarters in St. Charles, Missouri. The Company maintains facilities in St. Charles, Missouri; Seattle, Washington; Tulsa, Oklahoma; Wichita, Kansas; Irving, Texas; Sun Valley, California; Vista, California; Savannah, Georgia, Ogden, Utah, and Mexicali, Mexico.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included.  Operating results for the three and six months ending June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.  These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission.

Customer Concentration

Direct sales to the Company’s largest customer accounted for 28.9% and 32.4% of the Company’s total revenues for the three months ended June 30, 2007 and June 30, 2006, respectively. Direct sales to the Company’s largest customer accounted for 31.3% and 32.6% of the Company’s total revenues for the six months ended June 30, 2007 and June 30, 2006, respectively. Account receivable balances related to the largest customer based on direct sales were 26.8% and 31.9% at June 30, 2007 and December 31, 2006, respectively.

Direct sales to the Company’s second largest customer accounted for 15.8% and 14.9% of the Company’s total revenues for the three months ended June 30, 2007 and June 30, 2006, respectively. Direct sales to the Company’s second largest customer accounted for 15.7% and 15.1% of the Company’s total revenues for the six months ended June 30, 2007 and June 30, 2006, respectively. Account receivable balances related to the second largest customer based on direct sales were 18.9% and 10.4% at June 30, 2007 and December 31, 2006, respectively.

Direct sales to the Company’s third largest customer accounted for 12.4% and 12.2% of the Company’s total revenues for the three months ended June 30, 2007 and June 30, 2006, respectively. Direct sales to the Company’s third largest customer accounted for 11.9% and 10.5% of the Company’s total revenues for the six months ended June 30, 2007 and June 30, 2006, respectively. Account receivable balances related to the third largest customer based on direct sales were 9.8% and 10.3% at June 30, 2007 and December 31, 2006, respectively.

Use of Estimates

6

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

June 30, 2007

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and all highly liquid investment instruments with an initial maturity of three months or less, excluding those held in our trading accounts.

Short-term Investments

Short-term investments consist of investment instruments with an initial maturity of one year or less, including those with an initial maturity of three months or less held in our trading accounts. At June 30, 2007, all securities were classified as held-to-maturity and recorded at amortized costs.

Income Taxes

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions.

The Company had no unrecognized tax benefits as of the January 1, 2007 adoption date and as of June 30, 2007. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2007. The Company recognizes accrued amounts of interest and penalties related to its uncertain tax positions as part of its income tax expense within its consolidated statement of operations. The Company has no interest or penalties relating to income taxes recognized in the balance sheet as of June 30, 2007. At June 30, 2007, returns for the calendar years 2002 through 2006 remain subject to examination by U.S. and various state tax jurisdictions.

2.  Inventories

		June 30, 2007		December 31, 2006
Raw materials		$	6,142	$	5,583
Work in progress			8,380		8,073
Manufactured and purchased components			8,714		8,438
Finished goods			13,964		11,862
	Total inventories	$	37,200	$	33,956

7

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

June 30, 2007

These amounts include reserves for obsolete and slow-moving inventory of $1,938 and $1,932 and a reserve for lower of cost or market of $303 and $255 at June, 2007 and December 31, 2006, respectively.

3.  Goodwill and Intangible Assets

As required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company performs a goodwill impairment test at least annually. A fair value approach is utilized by management regarding projected cash flows and other factors to determine the fair value of the respective assets. If required, an impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its fair value.

In the fourth quarter of 2006, the Company performed the required annual impairment test under SFAS No. 142 and concluded that the remaining goodwill balance was not further impaired.  Goodwill balance was $5,653 at June 30, 2007 and December 31, 2006.

Customer-Related Intangible Assets

Customer-related intangible assets resulted from the acquisitions of Versaform and Technical Change Associates, Inc. and have an original estimated useful life of 5 to 15 years.  The carrying value at June 30, 2007 and December 31, 2006 were as follows:

	June 30, 2007		December 31, 2006
Gross Amount	$	4,694	$	4,694
Accumulated Amortization		(1,474)		(1,269)
Intangible assets, net	$	3,220	$	3,425

Customer related intangibles amortization expense was $103 and $136 for the three months ended June 30, 2007 and 2006, respectively, and $205 and $202 for the six months ended June 30, 2007 and 2006, respectively.

4.  Long-Term Debt and Revolving Line of Credit

Long-term debt at June 30, 2007 and December 31, 2006, respectively, consists solely of various notes payable for the purchase of certain equipment. The notes are payable in monthly installments including interest at fixed annual rates ranging from 6.70% to 7.20% through January 2012. The notes payable are secured by the equipment purchased.

8

 LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

June 30, 2007

On December 28, 2006, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Agreement provides for a $40,000 revolving loan facility, under which there is no requirement to provide a borrowing base of collateral to support advances. The revolving loan facility is subject to an unused commitment fee and bears an interest rate between LIBOR plus 0.75% and 1.75% based on the ratio of the Company’s total funded debt to earnings before interest, taxes, depreciation and amortization. The outstanding principal balance is due and payable in full on March 31, 2012.  The credit facility is secured by all of the Company’s non-real estate assets and requires the Company to meet certain financial and non-financial covenants. At June 30, 2007, there were no outstanding balances under this facility.

In connection and concurrently with its acquisition of D3 Technologies, Inc. on July 31, 2007, the Company entered into a new credit facility with Wachovia Bank, N.A. replacing the Credit Agreement with Wells Fargo.  See Note 7 below.

5.  Earnings Per Common Share

Basic net income per common share is based upon the weighted average number of common shares outstanding. Diluted net income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect of stock options and restricted stock, using the treasury stock and if converted methods.  The number of such shares for the quarter ended June 30, 2007 and June 30, 2006 subject to stock options and restricted stock was 116,219 and 126,750, respectively.  The number of such shares for the six months ended June 30, 2007 and June 30, 2006 subject to stock options and restricted stock was 120,329 and 124,950, respectively.

6.  Stock-Based Compensation

On July 7, 2005, the Company’s shareholders approved the LMI Aerospace, Inc. 2005 Long-term Incentive Plan (the “2005 Plan”). The 2005 Plan replaced the Amended and Restated LMI Aerospace, Inc. 1998 Stock Option Plan (the “1998 Plan”) as the Company’s only compensation plan under which shares of the Company’s common stock are authorized for issuance to employees or directors. The 2005 Plan provides for the grant of non-qualified stock options, incentive stock options, shares of restricted stock, restricted stock units, stock appreciation rights, performance awards and other stock-based awards and cash bonus awards. A total of 1,200,000 shares of the Company’s Common Stock are reserved for issuance in connection with awards granted under the 2005 Plan.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which revises and replaces SFAS No. 123, “Accounting for Stock-Based Payments” (“SFAS No. 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS No. 123R requires that compensation expense be recognized for all share-based payments based on the grant date fair value. The Company adopted SFAS No. 123R using the modified prospective method of transition. Accordingly, prior periods have not been restated. In connection with the adoption of SFAS No. 123R, the Company’s pre-tax income from operations for 2006 was not materially different than if it had continued to account for share-based compensation under APB No. 25, as the majority of outstanding options was vested at December 31, 2005. The Company did not grant any options during the three and six months ended June 30, 2007 and June 30, 2006, respectively.

9

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

June 30, 2007

A summary of stock option activity under the Company’s share-based compensation plans for the six months ended June 30, 2007 is presented below:

Stock Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at January 1, 2007		137,234		$	3.24
Granted		-			-
Exercised		(300	)		4.75
Forfeited or expired		(300	)		4.75
Outstanding at June 30, 2007		136,634		$	3.24	3.6 yrs	$	2,878
Exercisable at June 30, 2007		136,634		$	3.24	3.6 yrs	$	2,878

The total intrinsic value of options exercised during the six months ended June 30, 2007 was $5 based upon the market price on exercise date.

The following table summarizes information about stock options outstanding at June 30, 2007:

Range of Exercise Prices	Number of Outstanding Options	Weighted Average Remaining Contractual Life		Weighted Average Exercise Price	Number Exercisable		Weighted Average Exercise Price
$1.31 - $1.95	12,000	7.0	$	1.31	12,000	$	1.31
$1.96 - $2.90	78,234	3.2		2.56	78,234		2.56
$2.91 - $4.35	13,500	3.5		3.51	13,500		3.51
$4.36 - $6.06	32,900	3.2		5.44	32,900		5.44
Total	136,634	3.6	$	3.24	136,634	$	3.24

A summary of the activity for non-vested restricted stock awards as of June 30, 2007 and changes during the six-month period is presented below:

10

 LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

June 30, 2007

Restricted Stock Awards	Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2007		37,000		$	12.85
Granted		30,552			17.98
Vested		(4,550	)		(14.16	)
Forfeited		-			-
Outstanding at June 30, 2007		63,002		$	15.24

Common stock compensation expense related to restricted stock awards granted under the 2005 Plan was $98 ($63 after tax) and $192 ($124 after tax) for the three and six months ended June 30, 2007 and $43 ($27 after tax) and $86 ($54 after tax) for the three and six months ended June 30, 2006.

At June 30, 2007 there was $647 of total unrecognized compensation costs related to non-vested share-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.6 years. At June 30, 2006 there was $409 of total unrecognized compensation costs related to non-vested share-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.3 years.

7.  Subsequent Event

On July 31, 2007, the Company acquired all of the outstanding capital stock of D3 Technologies, Inc. (“D3 Technologies”), a premier design and engineering services firm, at a purchase price of $65,000 in cash.

Concurrent with the acquisition, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wachovia Bank, National Association (as Administrative Agent, Swingline Lender and Issuing Lender), Wells Fargo Bank, National Association (as Syndication Agent) and the other lender parties. The Credit Agreement provides for a senior secured revolving credit facility in an aggregate principal amount of up to $80,000 (the “Facility”). Borrowings under the Facility are secured by substantially all of the Company’s assets and bear interest at either the “Base Rate” (the higher of the federal funds rate plus one-half of one percent or the prime commercial lending rate of Wachovia Bank) plus the applicable interest margin ranging from 0.125% to 1.0%, depending upon the Company’s then total leverage ratio or the LIBOR rate.  Interest accruing under the LIBOR rate option is defined as the LIBOR rate plus the applicable interest margin ranging from 1.125% to 2.0% depending upon the Company’s then total leverage ratio.  The maturity date of the Facility, which is subject to acceleration upon breach of the financial covenants (consisting of a maximum total leverage ratio and a minimum fixed charge coverage ratio) and other customary non-financial covenants contained in the Credit Agreement, is July 31, 2012.

The purchase price for D3 Technologies was funded in part with $38,500 of borrowings under the Credit Agreement and the remainder with the Company’s existing cash.

11

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements.  The Company makes forward-looking statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Quarterly Report on Form 10-Q, which represent the Company’s expectations or beliefs about future events and financial performance.  When used in this report, the words “expect,” “believe,” “anticipate,” “goal,” “plan,” “intend,” “estimate,” “may,” “will” or similar words are intended to identify forward-looking statements.  These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions, including those referred to in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on March 15, 2007.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.  In addition, actual results could differ materially from those suggested by the forward-looking statements.  Accordingly, investors are cautioned not to place undue reliance on the forward-looking statements.  Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Investors should, however, review additional disclosures made by the Company from time to time in its periodic filings with the Securities and Exchange Commission.

This Quarterly Report on Form 10-Q should be read completely and with the understanding that the Company’s actual future results may be materially different from what the Company expects.  All forward-looking statements made by the Company in this Form 10-Q and in the Company’s other filings with the Securities and Exchange Commission are qualified by these cautionary statements.

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the Company to make estimates and assumptions. (See Note 1 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q.)

The Company believes that certain significant accounting policies have the potential to have a more significant impact on the financial statements either because of the significance of the financial statements to which they relate or because they involve a higher degree of judgment and complexity.  A summary of such critical accounting policies can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

12

OVERVIEW

We manufacture and distribute formed and machined components for use in the aerospace, technology and commercial sheet metal industries. We primarily sell our products to the large commercial aircraft, military, corporate and regional aircraft, and technology markets within the aerospace and technology industries. Historically, our business was primarily dependent on the large commercial aircraft market, with Boeing as our principal customer. In order to diversify our product and customer base, we implemented an acquisition and marketing strategy in the late 1990’s that has broadened the number of industries to which we sell our components, and, within the aerospace industry, diversified our customer base to reduce our dependence on Boeing.

Beginning in 2001, we began an aggressive acquisition campaign that resulted in the consummation of four transactions through 2002.  In April 2001, we acquired Tempco Engineering, Inc. (“Tempco”) and its affiliates, which expanded our aerospace product line and introduced us to the technology industry.  In 2002, we acquired Versaform Corporation and certain of its affiliates (“Versaform”), as well as Stretch Forming Corporation (“SFC”) and Southern Stretch Forming and Fabrication, Inc. (“SSFF”).  The Versaform acquisition significantly increased our presence in the corporate and regional aircraft market while adding various military products to our product line.  The SFC acquisition further supplemented our military product line.  Finally, our acquisition of SSFF increased our business in the corporate and regional aircraft market.

In January 2006, we acquired the assets of Technical Change Associates, Inc. (“TCA”), a provider of lean manufacturing, facility layout and business planning consulting services. This acquisition will facilitate our continued efforts in improving production efficiency as well as supporting our other operational objectives.

On July 31, 2007, we acquired all of the capital stock of D3 Technologies, Inc., a premier design and engineering services firm based in San Diego, California for a purchase price of $65 million in cash.  We believe that the combined capabilities of LMI and D3 Technologies will substantially improve the value proposition that we can offer our customers, provide additional participation with the aerospace industry and add unique composite materials engineering expertise.  See Part II, Item 1A “Risk Factors” and Note 7 of the Condensed Consolidated Financial Statements.

13

RESULTS OF OPERATIONS

Three months ended June 30, 2007 compared to June 30, 2006

The following table is a summary of our operating results for the three months ended June 30, 2007 and June 30, 2006:

	Three Months Ended		Three Months Ended
	June 30, 2007		June 30, 2006
	($ in millions)
Net sales	$	33.9	$	32.8
Cost of sales		24.7		23.9
Gross profit		9.2		8.9
S,G & A		4.9		4.2
Income from operations		4.3		4.7
Interest income (expense), net		0.1		0.1
Income before income taxes		4.4		4.8
Provision for income taxes		1.5		1.8
Net Income	$	2.9	$	3.0

Net Sales.  The following table specifies the amount of net sales by category for the second quarter of 2007 and 2006 and the percentage of total net sales for each period represented by each category (dollars in millions).

Category	Three Months Ended June 30, 2007		% of Total			Three Months Ended June 30, 2006		% of Total
Corporate and Regional Aircraft	$	11.4		33.7	%	$	12.5		38.1	%
Large Commercial Aircraft		11.4		33.5			9.5		29.0
Military		8.3		24.6			7.8		23.8
Technology		1.6		4.9			1.9		5.8
Other (1)		1.1		3.4			1.1		3.4
Total	$	33.9		100.0	%	$	32.8		100.0	%

(1)  Includes various aerospace products and consulting revenue.

Net sales for the second quarter of 2007 were $33.9 million, up 3.4% from $32.8 million in the second quarter of 2006. The increase in net sales occurred in the large commercial aircraft and military markets we serve and was offset by decreases in corporate and regional aircraft and technology sales.

Net sales of components for corporate and regional aircraft decreased $1.1 million or 8.8% from $12.5 million for the quarter ended June 30, 2006 to $11.4 million for the quarter ended June 30, 2007.  This decrease was primarily attributable to lower sales to Gulfstream. A new ordering process with Gulfstream caused a spike in net sales in the second quarter of 2006. Subsequent quarters, including the second quarter of 2007, have not reached the same level as we have worked with the customer to improve various elements of the new ordering process.

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Net sales of products used in large commercial aircraft were $11.4 million for the second quarter of 2007, an increase of $1.9 million or 20% from $9.5 million in the second quarter of 2006. Net sales to this market were driven by higher production rates on certain models of Boeing aircraft. In particular, we generated net sales for the Boeing 737 of $6.6 million in the second quarter of 2007, up 24.3% from $5.3 million in the second quarter of 2006, and net sales for the Boeing 747 of $2.5 million in the second quarter of 2007, up 29.5% from $1.9 million in the second quarter of 2006. In addition, sales for the Boeing 787, which began in the first quarter of 2007 generated $0.5 million in the second quarter. These increases were partially offset by a $0.5 million decrease in sales for the Boeing 777 from $1.7 million in the second quarter of 2006 to $1.2 million in the second quarter of 2007 due to the substantial completion in the second quarter of 2006 of a temporary 777 wing component offload program that had contributed $0.9 million of net sales in the second quarter of 2006.

Military products generated $8.3 million of net sales in the second quarter of 2007 compared to $7.8 million in the second quarter of 2006, an increase of $0.5 million or 6.4%.  New programs supporting the Sikorsky Black Hawk helicopter program generated $5.0 million of net sales in the second quarter of 2007, up 15.6% from $4.3 million of net sales in the second quarter of 2006. This was offset by declining volume on the Lockheed F-16.

Technology products generated $1.6 million of net sales for the second quarter of 2007 compared to $1.9 million for the second quarter of 2006, a decrease of 15.8%.  This decrease was due to lower net sales of products used in both semiconductor equipment and medical technology products.

Gross Profit.  Gross profit for the second quarter of 2007 was $9.2 million (27.1% of net sales), compared to $8.9 million (27.1% of net sales) in the second quarter of 2006. Gross profit was positively impacted by our higher production rates with aerospace customers which provided better coverage of fixed costs, but was reduced by increased salaries and wages, primarily from investment in the materiel organization and higher than expected workers compensation cost related to prior year claims. Specifically, salary and wages increased $0.6 million, or 13%, from $4.6 million for the three months ended June 30, 2006 to $5.2 million for the three months ended June 30, 2007. Additional workers compensation cost incurred for prior year claims was $0.3 million for the three months ended June 30, 2007.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the second quarter of 2007 were $4.9 million (14.5% of net sales) compared to $4.2 million (12.8% of net sales) in the second quarter of 2006.  This increase resulted from higher professional service fees and compensation and fringe benefit costs resulting from increased staffing to support our planned growth.

Net Interest Income (Expense).  Interest income for the second quarter of 2007 was $0.1 million, unchanged from the second quarter of 2006. Our indebtedness was substantially reduced with the proceeds of our secondary public offering of common stock completed in March 2006. We continue to pay interest on certain equipment loans which remain outstanding and certain banking fees to maintain our borrowing availability.  We generated interest income by investing cash on hand of approximately $16 million.

Income Tax Expense.  During the second quarter of 2007, we had income tax expense of $1.5 million compared to $1.8 million in the second quarter of 2006. We applied an effective tax rate of 34.9% to income for the second quarter of 2007 compared to 37.5% for the second quarter of 2006. The reduction in rate is derived from additional deductions available for manufacturers and strategies used to reduce state income taxes.

Six months ended June 30, 2007 compared to June 30,2006

The following table is a summary of the Company’s operating results for the six months ended June 30, 2007 and June 30, 2006:

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	Six Months Ended		Six Months Ended
	June 30, 2007		June 30, 2006
	($ in millions)
Net sales	$	66.1	$	62.0
Cost of sales		48.6		44.8
Gross profit		17.5		17.2
S,G & A		9.9		8.4
Income from operations		7.6		8.8
Interest income (expense), net		0.3		(0.3	)
Income before income taxes		7.9		8.5
Provision for income taxes		2.8		3.2
Net Income	$	5.1	$	5.3

Net Sales.  The following table specifies the amount of net sales by category for the six months ended June 30, 2007 and 2006 and the percentage of total net sales for each period represented by each category (dollars in millions).

Category	Six Months Ended June 30, 2007		% of Total			Six Months Ended June 30, 2006		% of Total
Corporate and Regional Aircraft	$	23.7		35.9	%	$	23.9		38.5	%
Large Commercial Aircraft		22.1		33.4			18.6		30.0
Military		14.9		22.5			12.8		20.6
Technology		3.3		5.0			3.9		6.3
Other (1)		2.1		3.2			2.8		4.5
Total	$	66.1		100.0	%	$	62.0		100.0	%

(1)  Includes various aerospace products and consulting revenue.

Net sales for the first six months of 2007 were $66.1 million, up $4.1 million or 6.6% from $62.0 million in the first six months of 2006.

Net sales of product for use on corporate and regional aircraft slightly decreased from $23.9 million for the first six months of 2006 to $23.7 million in the first six months of 2007.  Increased sales to Gulfstream were offset by lower production rates in regional aircraft.

Net sales of product used in large commercial aircraft were $22.1 million for the six months ended June 30, 2007, an increase of $3.5 million or 18.8% from $18.6 million for the six months ended June 30, 2006.  This increase was driven by higher production rates on certain models of Boeing aircraft. Specifically, we generated $12.8 million net sales for the Boeing 737 during the six months ended June 30, 2007, up 24.6% from $10.2 million net sales for the six months ended June 30, 2006. We also generated net sales of $4.9 million for the Boeing 747 during the first half of 2007, up 25.6% from $3.9 million net sales for the first half of 2006. In addition, we began shipments for parts used on the Boeing 787 in 2007 and generated $0.7 million net sales for the first half of the year. Partially offsetting the increase was a decrease of sales on a 777 wing component offload program that was substantially completed in the second quarter of 2006.

Military products generated $14.9 million of net sales in the first half of 2007 compared to $12.8 million in the first half of 2006, an increase of $2.1 million or 16.4%.  This increase was primarily attributable to the 38.3% growth in sales of components and assemblies for Sikorsky’s Black Hawk program which generated $8.3 million in the first half of 2007 compared to $6.0 million in the first half of 2006. This was offset by declining volume on the Lockheed F-16.

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Technology products generated $3.3 million of net sales for the six months ended June 30, 2007 compared to $3.9 million for the six months ended June 30, 2006, a decrease of $0.6 million or 15.4%.  This decrease was due to lower net sales of products used in both semiconductor equipment and medical technology products.

Gross Profit.  Gross profit increased from $17.2 million (27.7% of net sales) for the six months ended June 30, 2006 to $17.5 million (26.5% of net sales) for the six months ended June 30, 2007. Gross profit was positively impacted by our higher production rates with aerospace customers which provided better coverage of fixed costs, but was reduced by increased salaries and wages, primarily from investment in the materiel organization and higher than expected workers compensation cost related to prior year claims. Specifically, salary and wages increased $1.2 million, or 13%, from $9.1 million for the six months ended June 30, 2006 to $10.3 million for the six months ended June 30, 2007. Additional workers compensation cost incurred for prior year claims was $0.5 million for the six months ended June 30, 2007.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $9.9 million (15.0% of net sales) during the six months ended June 30, 2007 compared to $8.4 million (13.5% of net sales) for the six months ended June 30, 2006.  This increase is primarily due to higher employment levels resulting in additional salaries, wages and fringe benefit costs to support our growth.

Net Interest Income (Expense).  Interest income for the first half of 2007 was $0.3 million compared to interest expense of $0.3 million in the first half of 2006.  During the first quarter of 2006, we concluded a public offering of common stock that raised $39.2 million in cash.  We used a portion of the proceeds to reduce the majority of our indebtedness and are currently investing the remaining balance plus the cash we are generating.

Income Tax Expense.  During the first half of 2007, we had income tax expense of $2.8 million compared to $3.2 million in the first half of 2006. The $0.6 million decrease was primarily due to a decreased effective tax rate derived from additional deductions available for manufacturers and strategies taken to reduce state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

During the first half of 2007, we used $3.0 million of cash in operating activities compared to $0.3 million cash provided during the first half of 2006. Cash was reduced by a $4.7 million increase in accounts receivable due to greater shipments near the end of the second quarter of 2007, changes in payment terms on certain contracts affecting 2007 and shifting of sales to programs with longer payment terms. Cash was also reduced by a $3.7 million increase in inventories, primarily due to increased levels of raw materials and finished goods. These inventory increases were due to production increases to support growing revenues expected in the last six months of 2007. Cash was also decreased by a $1.9 million reduction in accounts payable, primarily due to a $0.6 million payment made to purchase inventory from a customer and a $0.8 million payment to purchase equipment.

Net cash used in investing activities was $11.7 million for the first half of 2007 compared to $8.8 million for the first half of 2006. We invested $16.0 million of funds in short-term securities, offset by cash proceeds from matured securities of $2.3 million. We also incurred $3.5 million of capital expenditures during the first half of 2007 compared to $1.8 million during the first half of 2006.  On December 28, 2006, we entered into an agreement with a third party to sell and lease back certain of our real estate properties for a total sale price of $10.3 million. The sale of one of these properties occurred on December 28, 2006 for a sale price of $4.3 million. On February 13, 2007, the sale of the three remaining properties was completed at a price of $5.9 million, which favorably impacted our cash flow. The total non-cash gain from sale of these properties of $4.3 million is deferred and will be recognized over the term of the lease.

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Cash provided by financing activities was $0.3 million for the first half of 2007 compared to $25.4 million for the first half of 2006. The 2006 increases resulted from our public offering of common stock, completed on March 29, 2006, reduced by payments of outstanding debt.

On July 31, 2007, we entered into a Credit Agreement (the “Credit Agreement”) with Wachovia Bank, National Association (as Administrative Agent, Swingline Lender and Issuing Lender), Wells Fargo Bank, National Association (as Syndication Agent) and the other lender parties. The Credit Agreement provides for a senior secured revolving credit facility in an aggregate principal amount of up to $80 million (the “Facility”). Borrowings under the Facility are secured by substantially all of our assets and bear interest at either the “Base Rate” (the higher of the federal funds rate plus one-half of one percent or the prime commercial lending rate of Wachovia Bank) plus the applicable interest margin ranging from 0.125% to 1.0%, depending upon our then total leverage ratio or the LIBOR rate.  Interest accruing under the LIBOR rate option is defined as the LIBOR rate plus the applicable interest margin ranging from 1.125% to 2.0% depending upon our then total leverage ratio.  The maturity date of the Facility, which is subject to acceleration upon breach of the financial covenants (consisting of a maximum total leverage ratio and a minimum fixed charge coverage ratio) and other customary non-financial covenants contained in the Credit Agreement, is July 31, 2012.

In connection with our acquisition of D3 Technologies, we borrowed a total of approximately $38.5 million under the Facility.

The foregoing description of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the Credit Agreement, a copy of which is attached as Exhibit 4.1 to our Form 8-K filed with the Securities and Exchange Commission on August 6, 2007.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

As discussed in the “Liquidity and Capital Resources” section, we completed the sale and leaseback of three real estate properties on February 13, 2007. The operating lease agreement resulting from the sale expires on February 28, 2025, and we have options for three additional five-year renewal terms. As of June 30, 2007, the impact of the lease on our future contractual obligations is as follow (dollars in thousands):

	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Operating Leases	$      11,190	$     521	$     1,077	$    1,128	$     8,464

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows.  We are exposed to market risk primarily due to fluctuations in interest rates.  We do not utilize any particular strategy or instruments to manage our interest rate risk.

Interest on both our credit facility outstanding at June 30, 2007 and our new Facility described above accrue at a fluctuating rate.  Thus, we are subject to potential fluctuations in our debt service as the base rate changes. Based on the amount of our outstanding debt as of June 30, 2007, a hypothetical 1% change in the interest rate of our outstanding credit facility would not result in significant changes in our annual interest expense.

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Item 4.  Controls and Procedures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended) as of June 30, 2007.  Based upon and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to the Company's management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

No change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.  Legal Proceedings.

Certain legal proceedings pending against the Company are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Through June 30, 2007, there have been no material developments in any legal proceedings reported in such Annual Report.

Item 1A.  Risk Factors.

Reference is made to the risk factors as previously disclosed in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2007.

Item 2.  Unregistered Sale of Equity, Securities and Use of Proceeds.

None.

Item 3.  Defaults Upon Senior Securities.

None.

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Item 4.  Submission of Matters to a Vote of Security Holders.

(a) The annual meeting of the shareholders of the Company was held on June 13, 2007.  Of the 11,596,749 shares entitled to vote at such meeting, 10,715,641 shares were present at the meeting in person or by proxy.

(b) The individuals listed below were elected as Class III Directors of the Company at the meeting, and the number of shares voted for, against and withheld were as follows:

Name	Number of Shares Voted
	For	Withheld
Ronald S. Saks	8,475,374	2,240,267
Joseph Burstein	9,724,169	991,472
Brian D. Geary	8,464,322	2,251,319

The individuals listed below are Directors whose term of office continued after the meeting:

Thomas G. Unger

John M. Roeder

Sanford S. Neuman

John S. Eulich

Judith W. Northup

(c) In addition to the election of Class III Directors, the shareholders ratified the appointment of BDO Seidman, LLP as the Company’s independent auditor for the fiscal year ending December 31, 2007.  The number of shares voted for, against and withheld were as follows:

	Number of Shares Voted
For	Against	Abstain
10,663,123	46,835	5,681

(d)           None.

Item 5.  Other Information.

At a meeting held on August 7, 2007, the Board of Directors of the Company appointed Ryan P. Bogan as a Vice President of the Company.  As previously disclosed, contemporaneously with the Company's acquisition of D3 Technologies, Mr. Bogan entered into an employment agreement with D3 Technologies providing for his continued services as the President and Chief Executive Officer of D3 Technologies to December 31, 2010.

Reference is made to Item 5.02 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2007 for the disclosure required by Item 5.02(c) of Form 8-K with respect to Mr. Bogan, which disclosure is incorporated herein by this reference.

Item 6.  Exhibits.

See Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Charles and State of Missouri on the 9th day of August, 2007.

LMI AEROSPACE, INC.

 /s/ Ronald S. Saks

Ronald S. Saks,

President and Chief Executive Officer

(Principal Executive Officer)

LMI AEROSPACE, INC.

 /s/ Lawrence E. Dickinson

Lawrence E. Dickinson

Chief Financial Officer and Secretary

(Principal Financial and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
10.1	Standard Industrial Lease Agreement dated June 9, 2006 between Welsh Fountain Lakes, L.L.C., as landlord and Leonard’s Metal, Inc., as tenant, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed June 15, 2006 and incorporated herein by reference.
10.2	Stock Purchase Agreement dated June 17, 2007 among John J. Bogan, Trustee of the John J. Bogan Separate Property Trust dated October 5, 1999, William A. Huston and LMI Aerospace, Inc., filed as Exhibit 2.1 to the Registrant’s Form 8-K filed June 18, 2007 and incorporated herein by reference.
31.1	Rule 13a-14(a) Certification of Ronald S. Saks, President and Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Lawrence E. Dickinson, Chief Financial Officer.
32	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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